India enters inflation comfort zone

NEW DELHI, Mon Jul 2 -- India's inflation rate has entered a "comfort zone" and fears of overheating in the economy are in the past, a top government official said on Monday, as he predicted growth of at least 8.5 percent this fiscal year.

"I certainly feel that the fear of overheating is behind us," Montek Singh Ahluwalia, deputy chairman of the planning commission, told Reuters in an interview.

"I mean the rate of inflation has been steadily coming down in each of the last five weeks. I would definitely say that we have entered the comfort zone as far as inflation is concerned."

India's most-widely tracked inflation rate fell more than expected to a 14-month low of 4.03 percent in mid-June, well below a two-year high of 6.69 percent in late January.

Ahluwalia, one of India's senior economic managers, said the economy should grow by at least 8.5 percent in the fiscal year to March 2008. An average of 9.0 percent growth over the next five years was achievable.

"Opinions vary but most people still think that the growth this year will be above 8.5 percent. I mean 8.5 percent is the lowest number that I have seen."

The Indian economy, Asia's third-largest, grew 9.4 percent in the fiscal year that ended in March, its highest rate in 18 years and second only to China among major economies.

Ahluwalia said monetary tightening measures adopted by the central bank had achieved the expected objective without hurting growth.

"I am pretty sure that the inflation rate is going to go down. The monetary tightening has achieved the objective that was expected and I don't think it has really killed the growth momentum."


RAISING FOOD PRODUCTION

The central bank has raised interest rates five times in the past year, the last time at the end of March, but could now hold its fire when it next reviews policy on July 31 with inflation now below its stated tolerance level for 2007/08 of 5 percent.

Ahluwalia said inflation would not be a problem in the next 5 to 6 months, assuming monsoon rains were normal.

"So I would therefore assume that any fear that, you know, we have to keep doing things to control inflation, I mean they are not warranted."

In its latest forecast, India's weather office has said monsoon rains in July -- the most crucial month for farm output -- were expected to be 95 percent of the long-period average.

Analysts say good monsoon rains will increase farm harvests, which in turn could help ease supply pressures and inflation.

Ahluwalia said the government was taking major steps to improve the supply of foodgrains, and aims to produce an additional 20 million tonnes of wheat and pulses in the next three to four years.

"In 2007/08 we expect to see a further increase in food grain production and the food security mission, which is just being launched, will lay out a whole series of steps."

The government plans to raise output of food items by 2011 to keep prices in check and ensure adequate supplies for the country's 1.1 billion people.

Rising food costs were a major contributor behind an annual increase in wholesale prices in late January, which pushed the inflation rate to a two-year high.

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